Case Law Details

Case Name : Cairn Energy India (P.) Ltd. Vs Director of Income-tax (International Taxation) (ITAT Chennai)
Appeal Number : IT Appeal No. 714 (MDS.) OF 2009
Date of Judgement/Order : 20/12/2012
Related Assessment Year : 2004-05
Courts : All ITAT (5168) ITAT Chennai (229)

Assessment order allowing deduction without examining the same is erroneous and CIT can exercise power U/s. 263

IN THE ITAT CHENNAI BENCH ‘C’

Cairn Energy India (P.) Ltd.

versus

Director of Income-tax (International Taxation)

IT APPEAL NO. 714 (MDS.) OF 2009

[Assessment year 2004-05]

DECEMBER 20, 2012

ORDER

Abraham P. George, Accountant Member

In this appeal filed by the assessee, it challenges an order dated 12.3.2009 passed by Director of Income-Tax (International Taxation), Chennai, under Section 263 of Income-tax Act, 1961 (in short ‘the Act’) inter alia, setting aside the assessment for the impugned assessment year and directing the A.O. to examine the allowability of deduction claimed by the assessee under Section 80IB of the Act and further, directing him to recompute such a deduction, as per law.

2. Facts apropos are that assessee, is a company incorporated in New South Wales, Australia as a subsidiary of one M/s Cairn Energy Plc. incorporated in Edinburgh, UK. Assessee is engaged in the business of exploration and production of oil and gas in India. It had acquired participating interest in the following oil and gas blocks:-

Sl.No. Block of Oil and Gas Field Area
1. Ravva Krishna Godavari
2. CB-OS/2 Cambay Offshore
3. KG-OS/6 Krishna Godavari
4. RJ/OS/90/1 Rajasthan
5. KG/DWN/98-2 Krishna Godavari

For acquiring such participating interest, assessee had entered into production sharing contracts with Government of India and joint operating agreement with other joint venturers involved in exploration of oil and operation of oil fields. As per the joint venture agreements, assessee had to operate each of the block.

3. Assessee filed its return for the impugned assessment year declaring an income of Rs. 49,16,89,833/-. Assessee had also sought deduction of Rs. 68,55,77,018/- under Section 80-IB(9) of the Act. Returned income was after claiming such deduction. As per the assessee, during the course of assessment proceedings, Assessing Officer had sought justification for claiming of deduction under Section 80-IB of the Act. On 3rd November, 2006, assessee had submitted a letter to Assessing Officer giving details of certain claims. Copies of the production sharing contracts, in relation to Ravva Satellite Gas Field and Lakshmi Gas Field for which such deduction was claimed, as also, break-up of exploration and development expenses were inter alia provided through this letter. It was mentioned in such letter that of the two units, namely, Satellite Gas Field and Lakshmi Gas Field on which deductions under Section 80-IB(9) were being claimed, Satellite Gas Field commenced production in September, 2001 and Lakshmi Gas Field commenced production in November, 2002. Assessee also mentioned that computation of such deduction was done on similar lines in its returns for the preceding assessment years. As per the assessee, these were duly supported by certificates from a Chartered Accountant. Thereafter, Assessing Officer completed the assessment on 28.12.2006 under Section 143(3) making certain disallowance for claims like site restoration cost, software purchase and club membership fees. However, deduction under Section 80-IB(9) was allowed as claimed, in full.

4. On 21.1.2009, DIT (International Taxation) issued a notice under Section 263 of the Act proposing to invoke the powers vested on him under that section, with regard to the order of assessment considering it to be erroneous and prejudicial to the interest of the Revenue. Reason mentioned by the DIT (International Taxation) in the show cause notice, is reproduced hereunder:-

“The assessee company claimed deduction u/s 80IB for the assessment year 2004-05 in respect of two units viz. (i) Rava Satellite Gas unit and (ii) Lakshmi Gas Field to the extent of Rs. 20,16,10,345 and Rs. 48,39,66,673 respectively. The same was allowed by the assessing officer in the assessment u/s 143(3) dated 28.12.2006. The claim of the company for deduction u/s 80IB(9) has not been computed in accordance with the provisions of section 80IB(13) read with section 80IA(5). Hence it is clear that the action of the assessing officer in computing deduction u/s 80IB in the order u/s 143(3) dated 28.12.2006 has rendered the assessment as erroneous in so far as it is prejudicial to the interest of revenue.”

5. On the above notice, assessee primarily replied that the assessment was completed after due examination. As per the assessee, the deduction was computed as required under Section 80-IB(13) read along with sub-section (5) and sub-sections (7) to (12) of Section 80-IA. Reproducing sub-section (5) and sub-sections (7) to (12) of Section 80-IA, assessee submitted that Assessing Officer had duly examined its claim and allowed it after such examination. Relying on the decision of Hon’ble Bombay High Court in the case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108, assessee argued that DIT could not substitute his judgment with that of Assessing Officer and could also not say that the order ought have been written more elaborately. Reliance was also placed on the decision of Hon’ble jurisdictional High Court in the case of Silver Cloud Estates (P.) Ltd. v. State of Tamil Nadu [1996] 219 ITR 244 (Mad.) in support of its contention that if there was any proposal to revise an order of subordinate authority, it was obligatory on the part of revisional authority to put forward all the relevant materials before the assessee and giving it an opportunity for rebuttal. Further reliance was also placed on the decision of Hon’ble Allahabad High Court in the case of CIT v. Taj Printers [1989] 178 ITR 384 for arguing that DIT was under an obligation to cite the points and record the reason why he considered the order of Assessing Officer erroneous and prejudicial to the interests of Revenue. In any case, as per the assessee, it had duly complied with provisions of Section 80-IA(5) and all the sub-sections (7) to (12) of Section 80-IA. Therefore, according to it, the claim under Section 80-IB(9) was as per law. Assessee once again pointed out that its accounts were audited and reports of the auditors were duly attached to the return. Assessee also mentioned that sub-sections (8) to (12) of Section 80-IA were not at all applicable to it.

6. However, DIT (International Taxation) was not impressed. According to DIT (International Taxation), for the Ravva Satellite Gas unit, one of the units on which deduction was claimed under Section 80-IB, assessee had never declared the first year of commercial production. Such a declaration, in his opinion, was essential. Further, as per DIT (International Taxation), assessee had not maintained separate accounts for the units on which it had claimed deduction under Section 80-IB of the Act from the inception of such units. Assessee had filed only consolidated Profit & Loss accounts and balance sheet for all the blocks, together. As per DIT(International Taxation), Satellite Gas unit was only a part of Ravva block, which was in operation since 1994 and was not a separate undertaking, as required under Section 80-IB(5) of the Act. Audited accounts for preferring a claim under Section 80-IB of the Act was filed for the impugned assessment year only and expenses incurred for Satellite Gas Unit, prior to year of its commercial production, were never carried forward or set off before working out the eligible deduction under Section 80-IB of the Act. Again, as per DIT (International Taxation), apportionment of expenses on a pro rata basis was itself an indicator that separate accounts for the units preferring claim under Section 80-IB of the Act, were never maintained and separate audits never done by the assessee.

7. Vis-à-vis Lakshmi Gas Field, observation of DIT (International Taxation) was that it was not a distinct undertaking but only a part of CBOS 2 block.

8. In a nutshell, as per the ld. DIT (International Taxation), Assessing Officer had allowed the claim under Section 80-IB(9) without examining the issue in the manner required under law. According to him, decision of Hon’ble Bombay High Court in the case of Gabriel India Ltd. (supra), that of Hon’ble jurisdictional High Court in the case of Silver Cloud Estates (P.) Ltd. (supra) and that of Hon’ble Allahabad High Court in the case of Taj Printers (supra) had no applicability on facts here. On the other hand, as per DIT (International Taxation), decision of Hon’ble jurisdictional High Court in the case of Ashok Leyland Ltd. v. CIT [2003] 260 ITR 599 squarely applied on facts. There was failure on the part of the Assessing Officer to examine in depth the claim of the assessee. Such a failure was, according to him, erroneous and prejudicial to the interests of Revenue. He, therefore, set aside the assessment done by the A.O. and directed him to examine the allowability of deduction under Section 80-IB, recompute such deduction and make a fresh assessment.

9. Now before us, learned senior counsel appearing for the assessee, submitted that in the first place, the reasons given in the order passed by DIT (International Taxation) were at variance from what was stated in the show cause notice. According to him, DIT (International Taxation) never mentioned in the show cause notice issued that assessee was not entitled for deduction under Section 80-IB of the Act. His only objection was that computation of deduction allowed under Section 80-IB(9) was not in accordance with sub-sections (13) and (5) of Sections 80-IB and 80-IA respectively. Ld. senior counsel also pointed out that assessee has filed a set of additional grounds which, inter alia, assailed the order of DIT (International Taxation) insofar as it violated the principles of natural justice. According to him, no opportunity was given to the assessee by the DIT (International Taxation) for giving its explanations with regard to the view taken by him that assessee was not eligible for deduction under Section 80-IB(9) of the Act. As per the ld. senior counsel, had assessee been put on notice, on this view proposed by the DIT (International Taxation), it would have given him a proper reply explaining how it was eligible for claiming such deduction. DIT (International Taxation) had only taken objection to the computation of deduction under Section 80-IB(9), in that it was not done in accordance with provisions of Section 80-IB(13) read with Section 80-IA(5) of the Act. According to him, once the DIT (International Taxation) found that assessee had duly replied to the notice, on these objections, he ought not have proceeded further. He came to a contradictory and factually incorrect conclusion for justifying the proceedings initiated under Section 263 of the Act. As per ld. senior counsel, the findings recorded in the order under Section 263 had no relevance to the reasons mentioned in show cause notice, and hence the order deserved to be quashed. Reliance was placed on the decision of co-ordinate Bench of this Tribunal in the case of Colorcraft Kashimira Ceramic Compound v. ITO [2007] 105 ITD 599 (Mum.), that of Hon’ble Delhi High Court in the case of CIT v. Contimeters Electricals (P) Ltd. [2009] 317 ITR 249, that of Hon’ble Andhra Pradesh High Court in the case of CIT v. G.K. Kabra, Cooperative Industrial Estate [1995] 211 ITR 336, that of Hon’ble jurisdictional High Court in the case of Silver Cloud Estates (P.) Ltd. (supra), and CIT v. PVP Ventures Ltd. [2012] 211 Taxman 554 and that of co-ordinate Bench of this Tribunal in the case of S.S.I. Ltd. v. Dy. CIT [2004] 85 TTJ 1049 and Sanco Trans Ltd. v. Asstt. CIT [1997] 61 ITD 317 (Mad.).

10. Further continuing his argument, ld. senior counsel submitted that notice itself was vague. It did not state as to why and how the computation of deduction under Section 80-IB(9) was not in accordance with Section 80-IB(13) read along with Section 80-IA(5) of the Act. According to him, assessee was not confronted with the fundamental reason why an adverse inference was drawn against it. Without giving any reason as to how the computation of the claim made by the assessee was incorrect, ld. DIT (International Taxation) had reached an adverse conclusion.

11. Again, as per the learned A.R., DIT (International Taxation)’s order was equally and if not more vague and contradictory. It had at two places mentioned that assessee was not eligible for deduction under section 80-IB(9) of the Act, whereas, in the last para, he directed the A.O. to examine the allowability of deduction and recompute such deduction. Further, according to him, allegation that the Assessing Officer had not conducted enquiries, was not based on any material but purely an assumption taken by the DIT (International Taxation). There was no mention by the DIT(International Taxation) in the notice issued to the assessee under Section 263 of the Act that there was any failure on the part of the Assessing Officer to make a proper enquiry. According to him, assessee had submitted all the details in support of its claim and filed the audit reports required with regard to such claim, Assessing Officer had further sought for certain details, which were also duly furnished. Special reference was made to paper-book pages 14 to 18 which, according to ld. senior counsel, gave full details of the claim for deduction under Section 80-IB(9) of the Act before the Assessing Officer. Ld. counsel also highlighted the portion therein where month of start of commercial production in respect of the two units was given. According to him, assessee had in its annexure to the Profit & Loss account filed along with the return given detailed computation of its claim for deduction under Section 80-IB of the Act. Reliance was placed on paper-book pages 26 to 30 and 38 to 42 in this regard. A.O. had considered such computation and thereafter reached a lawful conclusion that assessee was eligible for deduction under Section 80-IB(9) of the Act. Assessment proceedings were on for more than one and half years and it was not proper to come to a conclusion that the Assessing Officer had not made proper enquiries. Thus, according to him, the ld. DIT (International Taxation) was trying to substitute his views with the lawful view taken by the Assessing Officer.

12. On merits, ld. senior counsel submitted that date of commercial production was duly shown by the assessee in the audit report in Form No.10CCB placed at paper-book pages 20 to 42. The date of commercial production for Satellite Gas Unit was 19.9.2001 and Lakshmi Gas Field was 1.11.2002 as per these reports. As for the observation of DIT (International Taxation) that Satellite Gas Unit was only a part of Ravva block and not a separate undertaking, ld. senior counsel submitted that each Gas Unit was a separate undertaking though it was essentially part of a block. According to him, Hon’ble Apex Court in the case of Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195 had clearly held that true test was not whether the new industrial undertaking connoted expansion of the existing business of the assessee but whether it was all the same a new and identifiable undertaking separate and distinct from existing business. As per the ld. senior counsel, Satellite Gas unit and Lakshmi Gas Field were separate undertakings and separate independent units, though it formed part of blocks called Ravva block and CBOS2 block respectively. As for the observation of the ld. DIT (International Taxation) that for claiming deduction under Section 80-IB of the Act, separate accounts had to be maintained from inception, ld. senior counsel submitted that there was no such requirement under the Act or Rules. Reliance was placed on the decision of Hon’ble Andhra Pradesh in the case of CIT v. Sree Krishna Pulverising Mills [2000] 241 ITR 262, that of Hon’ble Allahabad High Court in the case of CIT v. Hind Lamps Ltd. [1991] 190 ITR 553, that of Hon’ble Karnataka High Court in the case of International Instruments (P) Ltd. v. CIT [1980] 123 ITR 11 and that of Hon’ble Bombay High Court in the case of Mahindra Sintered Products Ltd. v. CIT [1989] 177 ITR 111.

13. As to the conclusion of the DIT (International Taxation) that earlier losses of Ravva block was not carried forward and set off against the profits before claiming deduction under Section 80-IB(9), ld. senior counsel submitted that this was against the law laid down by Hon’ble jurisdictional High Court in the case of Velayudhaswamy Spinning Mills (P) Ltd. v. Asstt. CIT [2012] 340 ITR 477. All in all, in the opinion of the ld. senior counsel, order of DIT (International Taxation) was ill conceived, the order as well as the show cause notice were vague and were at variance with each other, the order under Section 263 was contradictory in itself, assessee was not given an opportunity for rebutting the views proposed to be taken, the order went by a wrong presumption that Assessing Officer had not enquired the claim for deduction and ignoring the fact that assessee had declared the date of commercial production for both units and correctly considered Satellite Gas Field and Lakshmi Gas Field as separate industrial undertakings. The order was bad also due to the reason that separate accounts which was not a requirement for preferring a claim for deduction under Section 80-IB was considered by the DIT (International Taxation) as essential.

14. Per contra, learned D.R., strongly supporting the order of DIT (International Taxation), submitted that there was no variance between the substance of the show cause notice issued under Section 263 and final order passed under Section 263 of the Act. The variance pointed out by the ld. senior counsel were all perfunctory and if at all there, curable under Section 292B of the Act. The scope and substance of both, notice under Section 263 and order under Section 263 were very same. Ld. DIT (International Taxation) had in fact proposed the very same line of action which he had finally upheld in the order under Section 263. It might be true that assessee had furnished some working regarding the claim of deduction made under Section 80-IB(9), but the basis of such working and fundamental assumptions taken by the assessee was never subjected to an enquiry or verification by the Assessing Officer. Assessee had simply allocated the total cost to the units on which the claim was preferred at arbitrary ratio on 1/5. On the allocation of cost, A.O. had never made any enquiries which he ought have done at the stage of assessment. The A.O. never made enquiry whether units on which claims were preferred were separate or such undertakings were only part of the already existing blocks already having production of oil. The A.O. never made enquiries as to how assessee had worked out such deduction in the earlier years. According to learned D.R., claim of the assessee that similar deductions were given to it in earlier years was also incorrect since assessee was not having any positive gross total income for earlier years. Thus, according to him, DIT (International Taxation) was justified in invoking revisonary power vested on him under Section 263 of the Act.

15. We have perused the orders and heard the rival submissions. We are in full agreement with the argument of the learned A.R. that in a proceeding under Section 263 of the Act, CIT cannot travel beyond the show cause notice and if he travels beyond the show cause notice, principles of natural justice demanded an opportunity to be given to the assessee before an order is finally framed. Additional ground taken by the assessee in this regard is definitely admissible, being a question of law and all facts necessary to decide that same is on record. Hence what is to be seen here is whether the DIT (International Taxation) had travelled beyond the notice under Section 263 of the Act while framing the order under Section 263 of the Act. We have reproduced the pertinent part of the notice at para four of our order above. What was stated in the said notice is that the claim for deduction under Section 80-IB(9) was not computed in accordance with provisions of Section 80-IB(13) read with Section 80-IA(5) of the Act. In his final order passed on 12.3.2009 under Section 263 of the Act, DIT (International Taxation) held that assessee was not eligible for claiming deduction under Section 80-IB of the Act. Finding of DIT (International Taxation) is reproduced hereunder for brevity:-

“RAVVA SATELLITE GAS UNIT

On perusal of the records it is seen that the assessee has not declared whether assessment year 2003-04 was the first year of commercial production or not. This declaration is necessary as claim U/s 80IB is available only from the year in which commercial production has commenced. As per the provisions of Section 80IB(13) r.w.s. 80IA(7) the undertaking claiming deduction has to get its accounts audited and file the audit report in the prescribed form. It is imperative that the undertaking claiming deduction needs to maintain separate accounts right from the date of inception in respect of the unit claiming deduction under this section. But the assessee company has shown the expenses relating to the satellite gas field in the accounts of the Ravva block and filed consolidated profit and loss accounts and balance sheet for the blocks as a whole.

The satellite gas unit is only a part of Ravva block which has been operating since 1994 onwards and is not a separate undertaking as it is required u/s 80IB(5). Further it is seen that the assessee company started preparing audited accounts only from the year in which it has started claiming deduction u/s 80IB and not from the date of inception. As a result, all the expenses incurred with respect to satellite gas unit prior to the year in which the commercial production has commenced has not been carried forward and set off from the profits against which the deduction u/s 80IB(9) has been made. On the contrary, the expenses of the gas unit having merged with the other blocks have been carried forward as the losses of the company as a whole and being set off in the subsequent years. Hence, the assessee’s claim of deduction u/s 80IB with respect of Ravva Satellite Gas Unit is not admissible. That the assessee has apportioned audit expenses into expenses attributable to the satellite unit and the other blocks on pro-rata basis is another indicator to the fact that no separate audit was undertaken for the 80IB unit. The assessing officer in the impugned order however has allowed the deduction U/s 80IB(9) without examining the issue in the manner narrated above. To that extent the action of the Assessing Officer is erroneous in as much as it is prejudicial to the interests of the Revenue.

Laxmi Gas field

This block comprises of various units – Amba, Gowri, Parvathy, Lakshmi and others. The assessee company has claimed that the Laxmi Gas Field has commenced its commercial production only from assessment year 203-04 onwards. Deduction u/s 80IB(9) of Rs. 4,46,72,736 and Rs. 48,39,66,673 relating to profits from Laxmi Gas Field was claimed and allowed during assessment year 2003-04 and 2004-05 respectively. It has been stated in the financial statement for the A.Y. 2001-02 vide para 3 of the note to the Financial Statements that “On 20th January 2001 the discovery of gas within the CBOS 2 Contract area called “Laxmi Gas Field was declared commercial by joint venture. The development area of Laxmi is being developed into a producing field.” From this statement it is clear that Laxmi Gas Field as such is not a separate undertaking distinct from CBOS 2 block but it only forms part of the CBOS 2 contract area Block. Hence Laxmi Gas Field is also not eligible for deduction u/s 80IB(9) of the Act. The assessing officer in the impugned order, however, has allowed the deduction U/s 80IB(9) without examining the issue in the manner narrated above. To that extent the action of the Assessing Officer is erroneous in as much as it is prejudicial to the interests of the Revenue.

The judicial decisions relied on by the learned authorized representative have been carefully perused and examined. In the case of Gabriel India Ltd. the issue was whether an order which has not been elaborated is erroneous and prejudicial. On the facts of that case the Hon’ble Bombay High Court (supra) held that section 263 does not visualize substitution of the judgment of CIT with that of the A.O. In the present case, however, the facts are different in the sense that there is no substitution of judgment involved. Therefore the ratio of that judgment is not applicable on the facts of the present case. In the case Silver Cloud Estates (supra) the Hon’ble court was dealing with the revisionary powers of the CIT and held that an opportunity of being heard should be given to the assessee before revising the assessment. The facts of that case are different from present one and are distinguished. Therefore the ratio of that judgment is not applicable to the facts of the case. In the case of Taj Printers (supra) the Hon’ble High Court held that the CIT before assuming jurisdiction U/s 263 has to specifically state the points for enquiry and record the reasons how the order of A.O. was erroneous or prejudicial to the interest of the revenue. In the present case the issues on which it was found that the A.O. has erred by virtue of which prejudice has been caused to the revenue have been clearly stated in the how cause notice dated 21.01.09. Therefore the facts are distinguished.

7. In support of my findings as above that the impugned order is erroneous and prejudicial to the interests of the Revenue, reliance is placed on the decision of Hon’ble Madras High Court in the case of M/s Ashok Leyland Ltd. v. Commissioner of Income-tax (260 ITR 599) wherein the jurisdictional High Court held that failure on the part of the assessing officer to examine in depth the claim of the assessee and his failure to do so is not only erroneous but also prejudicial to the Revenue.

8. From the above, it is held that the assessment order u/s 143(3) dated 28.12.2006 in which the deduction u/s 80IB was allowed by the assessing officer is erroneous and prejudicial to interests of the Revenue and is, therefore, set aside. The assessing officer is directed to examine the allowability of deduction and recompute the deduction u/s 80IB of the Act as per the provisions of I.T. Act and recompute the total income for the assessment year 2004-05 and make a fresh assessment order after giving the assessee adequate opportunity of being heard.”

16. There is no dispute that assessee had claimed deduction under Section 80-IB(9), supported by audit report required under Section 80-IA(7) in Form No.10CCB, both with respect to Satellite Gas Field and also with respect to Lakshmi Gas Field. In fact, there were two separate audit reports for these. It is also true that along with such audit reports, assessee had also filed a computation as to how it arrived at the claim for deduction under Section 80IB(9) of the Act. In such annexures, assessee had given a short narration of the basis for allocation of its expenses to the units enjoying the tax holiday, out of its total cost. A short reasoning for allocation was given by the assessee at col. 5 of its annexure to the audit report, wherein each head of operating expenses were mentioned. During the course of assessment proceedings, Assessing Officer had obviously sought from the assessee the basis for claim of deduction under Section 80-IB(9) of the Act. Assessee’s letter dated 03.11.2006 addressed to the Assessing Officer clearly mentions that such letter was being filed as called for by the Assessing Officer. In such letter, assessee had mentioned the month of commencement of commercial production of both these units.

17. At this juncture, it is required to have a look at Section 80-IB(13), mentioned by the DIT (International Taxation) in the show cause notice, and this is reproduced hereunder:-

“80-IB(13) The provisions contained in sub-section (5) and sub-sections (7) to (12) of section 80-IA shall, so far as may be, apply to the eligible business under this section.”

Thus for preferring a deduction under Section 80-IB of the Act, the eligible business shall comply with sub-section (5) and sub-sections (7) to (12) of Section 80-IA of the Act so far as it could apply. This in turn necessitates a look at sub-section (5) and sub-sections (7) to (12) of Section 80-IA and these are reproduced hereunder:-

“(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.”

“(7) [The deduction] under sub-section (1) from profits and gains derived from an [undertaking] shall not be admissible unless the accounts of the [undertaking] for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant.

(8) Where any goods [or services] held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods [or services] held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods [or services] as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods [or services] as on that date :

Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.

[Explanation.-For the purposes of this sub-section, “market value”, in relation to any goods or services, means the price that such goods or services would ordinarily fetch in the open market.]

(9) Where any amount of profits and gains of an [undertaking] or of an enterprise in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading “C.-Deductions in respect of certain incomes“, and shall in no case exceed the profits and gains of such eligible business of [undertaking] or enterprise, as the case may be.

(10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.

(11) The Central Government may, after making such inquiry as it may think fit, direct, by notification in the Official Gazette, that the exemption conferred by this section shall not apply to any class of industrial undertaking or enterprise with effect from such date as it may specify in the notification.

(12) Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger-

(a)  no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and

(b)  the provisions of this section shall, as far as may be, apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place.”

18. As per the assessee, its computation was in accordance with above provisions. Claim of the assessee is that there was no loss from earlier years to be set off and even otherwise, there was no requirement of such set off, which is a view affirmed by Hon’ble jurisdictional High Court in the case of Velayudhaswamy Spinning Mills (P.) Ltd. (supra). Further, according to assessee, it had provided audit report as required under sub-section (7) and other sub-sections (8) to (12) had no applicability. Ld. DIT (International Taxation) has held that Satellite Gas Field was only a part of Ravva block, which was operating since 1994 and Assessing Officer had not examined whether it was a separate undertaking as required under Section 80-IB(5) of the Act. No doubt, in the show cause notice to the assessee, Section 80-IB(5) does not find a mention. However, it cannot be denied that if the deduction was worked out not in accordance with Section 80-IB(13) and sub-sections (7) to (12) of Section 80-IA, then a claim for deduction under Section 80-IB(9) cannot be allowed. When viewed from this angle, non-mentioning of Section 80-IB(5) in the show cause notice cannot be considered as so cardinal an error that would render the whole proceedings void or invalid. Section 292B can cure even if there was a slight lacunae of the nature mentioned, since the proceedings culminating in the order under Section 263 was in substance and effect in conformity with or according to the intent and purpose of the Act.

19. Conclusion of the DIT (International Taxation) that Assessing Officer had not examined whether Satellite Gas unit under Ravva block was a separate undertaking and whether commercial production had commenced on the dates mentioned by the assessee, also appears to be correct. Assessee itself in its Synopsis submitted before this Bench, has mentioned that for financial year 2001-02 relevant to assessment year 2002-03, no deduction was claimed under Section 80-IB. Relevant paragraphs 7.5 and 7.10 appearing in said Synopsis, are reproduced hereunder:-

“7.5 It is submitted that, in the financial year 2001-02 relevant to assessment year 2002-03, there was a loss of Rs. 7,23,45,637/- in the undertaking namely Satellite Gas Field and, as such no deduction u/s 80IB(9) of the Act was claimed. This is evident from Auditor’s report in Form No.10CCB u/s 80IB(9) read with section 80IA(7) and, Rule 18BBB of Income-tax Rules, 1962 of the financial year 2002-03 relevant to assessment year 2003-04 at page 64 of the paper-book -II. Further, in financial year 2002-03 relevant to assessment year 2003-04, there was a profit of Rs. 13,70,77,470/- (see page 64 of paper-book-II) in Satellite Gas Field and after adjusting the loss of Rs. 7,23,45,637/- of assessment year 2002-03, there was a net profit of Rs. 6,47,37,833/-. A copy of the Auditor’s Report alongwith profit and loss account for assessment year 2003-04 is placed at pages 54 to 64 of paper-book. However, despite the aforesaid profit in assessment year 2003-04, no deduction was claimed, as deduction had to be restricted to gross total income (see page 60 read with page 64 of paper-book). A copy of the computation of income for the financial year 2002-03 relevant to assessment year 2003-04 is placed at pages 42 to 44 to of this Synopsis.

7.10 It is submitted that, in the financial year 2002-03 relevant to assessment year 2003-04, there was a profit of Rs. 4,46,72,736/- (see page 75 of paper-book-II) in the undertaking namely Lakshmi Gas Field and, as such no deduction u/s 80IB(9) of the Act was claimed on account of the reason that the Gross Total Income of the assessee for the assessment year 2003-04 is nil after setting off past losses. This is evident from Auditor’s report in Form No.10CCB u/s 80IB(9) read with Section 80IA(7) and, Rule 18BBB of the Income-tax Rules, 1962 (pages 65 to 75 of the paper-book-II). However, despite the aforesaid profit in assessment year 2003-04 no deduction was claimed, as deduction had to be restricted to gross total income (see page 75 of paper-book). A copy of the computation of income for the financial year 2002-03 relevant to assessment year 2003-04 is placed at pages 42 to 44 of this Synopsis.”

Thus, for earlier years, Assessing Officer had no occasion to examine the claim of deduction under Section 80-IB of the Act. May be it is true that assessee had worked out such deduction and filed a computation of such deduction along with return of income for such earlier, though it did not prefer such claim, on account of its gross total income being negative. Since there was no effective claim by the assessee, Assessing Officer in all probability would have considered a detailed examination of such claim a futile exercise. In our opinion, in such circumstances, Assessing Officer had no occasion to consider the correct date of commencement of commercial production in respect of two units in the earlier years. In fact, this was first year in which assessee was preferring an effective claim under Section 80-IB of the Act atleast in respect of the Satellite Gas unit under Ravva block.

20. Ld. DIT (International Taxation) having found that the computation was not done in accordance with the Section, had made an observation that assessee was not eligible for such deduction at all at para six of his order. Nevertheless, in our opinion, the final direction of the DIT (International Taxation) is very clear. He has only directed the A.O. to examine the allowability of deduction and recompute the deduction under Section 80-IB of the Act, in accordance with law. Therefore, his observation in the earlier part of the order that the claim itself was not allowable, could at the best be considered as passing remarks only, not binding on the A.O. Assessing Officer, in any case, was duty bound to examine the allowability of deduction in accordance with law. Effective finding of the DIT (International Taxation) was that Assessing Officer had not examined the issue in the manner required under Act, but had allowed the claim.

21. Adverting to the various case laws relied on by the learned senior counsel in support of his contention that DIT (International Taxation) could not travel beyond what was mentioned in show cause notice issued under Section 263, in our opinion, none of these are relevant here, for the simple reason that there was no effective variance between what was mentioned in the notice under Section 263 and order under Section 263 of the Act. The order under Section 263 was in fact the net effect of the various lacunae in the order of the A.O. vis-à-vis the claim under Section 80-IB(9) of the Act.

22. There is indeed a claim that assessee was not given a fair chance to explain its case by the DIT (International Taxation). Reliance in this regard has been placed by ld. senior counsel on the decision of Hon’ble jurisdictional High Court in the case of Silver Cloud Estates (P.) Ltd. (supra). As per the ld. senior counsel, this decision was an authority for the rule that a revisionary order has to give out the relevant materials relied on by such authority and assessee has to be given an opportunity to rebut it. In the said case, which was in relation to Agricultural Income-tax Act of Tamil Nadu, show cause notice was issued for a reason that assessee had claimed excess expenditure. As per ld. senior counsel, here also the reason cited by the DIT (International Taxation) is very similar. In the show cause notice the allegation is that claim for deduction under Section 80-IB(9) was not computed in accordance with Section 80-IB(13) read with section 80-IA(5) of the Act. The argument of the ld. senior counsel, would appear very attractive at the first blush. But the fact of the matter is that the same decision viz. that of Silver Cloud Estates Pvt. Ltd. (supra) was relied on by the assessee, in the course of its submission before DIT (International Taxation) as well. Ld. DIT (International Taxation) has also dealt with this case in his order. He has mentioned that Hon’ble jurisdictional High Court in the case of Silver Cloud Estates (P.) Ltd. (supra) was dealing with revisionary power of Commissioner where opportunity of being heard was not given to the assessee. Thus, what comes out is that even before the DIT (International Taxation), assessee had taken a plea that DIT (International Taxation) could not travel beyond what was stated in the notice under Section 263 of the Act. In other words, this can only mean that DIT (International Taxation) had put assessee on notice that it was not eligible for claiming deduction under Section 80-IB of the Act during the course of the proceeding before him. But for this, there was no reason why assessee relied on the decision in the case of Silver Cloud Estates (P.) Ltd. (supra) and why DIT (International Taxation) answered such plea. Hence assessee’s plea that it was not granted an effective opportunity by DIT (International Taxation) also cannot be accepted.

23. Now coming to the case of PVP Ventures Ltd. (supra) of Hon’ble jurisdictional High Court, on which much reliance has been placed by the ld. senior counsel, no doubt, it was held that there could not be a subsequent change of reason based on the reply given to a notice issued under Section 263 of the Act. In our opinion, this case would not help the assessee in any manner. As already held by us, effect of non-computation of the deduction in the manner specified in the Act, could have resulted only in denial of Section 80-IB. We cannot say that the order under Section 263 was at variance with the show cause notice. Even if there was some variance, it was as already pointed out by us, not to such an extent not curable under Section 292B of the Act.

24. As already mentioned by us, assessee had given Assessing Officer a short description of an allocation of expenses based on which it had preferred a claim under Section 80-IB, but, unless and until assessee could make a meaningful link of the basis adopted by it for such allocation of expenses, with its eventual claim of deduction under Section 80-IB of the Act, it could not be considered as a proper and sufficient submission of details enabling a rationale decision to be reached regarding the quantum or allowability of its claim. There was no linkable chain discernible from records, before the Assessing Officer pertaining to the allocation of expenses, date of commencement of production and independent nature of the units on which the claim was preferred. There is nothing to show that these were duly considered by the Assessing Officer in the original assessment proceedings. Assessee having given a break-up of the expenses allocated to the units on which it was claiming deduction under Section 80-IB of the Act, Assessing Officer ought have been prodded on to probe the correctness of such allocation and decide whether the claim itself was in accordance with law. The only conclusion that can be arrived in such a situation was that there was no application of mind by the Assessing Officer with regard to such a claim. When there is non-application of mind by the Assessing Officer, we can definitely say that the order of A.O. is erroneous and prejudicial to the interests of Revenue. It is not disputed that the claim was allowed as put forward by the assessee without any variation in the amount. In such a situation, the only relevant question that has to be answered is whether DIT (International Taxation) was justified in invoking Section 263 of the Act. The merits of the case may not have much impact. Non-application of mind by the A.O., on the details submitted in the form of audit report and break-up of cost allocation, is writ large in the assessment order. The assessment order simply mentions that the claim of deduction under Section 80-IB is allowed “as made by the assessee”. Failure to form an opinion is clear. This has definitely resulted in such assessment being erroneous and prejudicial to the interests of Revenue. The events which unfolded during assessment proceedings give rise to a strong signal that there was no application of mind, which a reasonable man sitting in the chair of a Revenue Officer should have done or in other words, there was an omission to apply the mind in a manner a reasonable man would have done in the given circumstances, causing detriment to the Revenue. It is to address such a situation, that Section 263 has been provided for in the Act. May be it is true that every claim, which is allowed to an assessee, need not be elaborately dealt with in an assessment order. However, the chain of events should show that there was application of mind atleast on the veracity of a claim made by the assessee. This is not seen here. It might be true that eligible undertaking need not maintain separate account for claiming deduction under Section 80-IB of the Act, but these were aspects, which were never verified by the Assessing Officer at the time of completing the assessment.

25. We, therefore, of the opinion that the finding of DIT (International Taxation) that the assessment was erroneous insofar as it was prejudicial to the interests of Revenue cannot be faulted. We do not find any reason to interfere in such an order of DIT (International Taxation).

26. In the result, appeal filed by the assessee is dismissed.

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Category : Income Tax (27505)
Type : Judiciary (11709)

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